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We seem to be on the right track with infrastructure and engineering expert Costain.
This month’s full-year results for 2023 (Mar 12) read well and suggest our investment case of a fat order backlog, improving operating margins and increased cash returns to shareholders is playing out nicely, especially as the company can also point to good order intake from the water and nuclear industries here in the UK.
Best of all, the valuation is still low. The projected dividend yield of 2pc may not have income-seekers hopping up and down on the spot, but the payment per share is expected to grow in 2024 after 2023’s return to the dividend list and that is down to both healthy cash flow and a net cash pile.
Adjusting for leases and a pension surplus, Costain ended last year with £194m in net cash on its balance sheet, more than the current market value, and the equivalent of 88pc of the company’s £219m in net assets.
Put another way, investors are currently valuing Costain’s operations, which are forecast to generate £1.3bn in sales and £40m in pre-tax income, at just £25m.
That low price tag will hopefully provide us with downside protection should anything go wrong, and upside should the Maidenhead-based company meet its goal of taking its operating return on sales to above 5pc, from 2023’s 3pc mark.
Questor says: buy
Ticker: COST
Share price at close: 67.4p
Shanta Gold
Whether a 10pc increase in the offer price from bidder and global conglomerate ETC Holdings (Mar 19) is enough to sway shareholders in Shanta Gold (SHG:AIM) remains to be seen.
If the deal does go through at 14.85p a share, with a dividend of 0.15p a share on top, we will bag a total return in excess of 50pc (Questor, Jan 10, 2023).
Given this column’s dismal record with junior miners, would be more than enough to keep us happy. That said, we can see why some shareholders may feel that even the higher bid represents a bit of a low-ball price.
It equates to a market value of £156m for a firm whose net assets are £133m , according to the last set of published results.
They were the first-half figures for 2023 that were released back in September.
That price tag implies a price-to-book, or price-to-net-asset-value, multiple of 1.17 times.
However, Newmont’s (NEM:NYSE) bid for Australia’s Newcrest in 2023 valued its target at 1.7 times and there is a good possibility of Shanta Gold growing its book value in future, should retained earnings flourish as expected, thanks to both increased output from its New Luika and Singida mines in Tanzania and an all-in sustained cost (AISC) of production of $1,200 (£949.26) to $1,400 an ounce.
With gold trading at $2,175 an ounce, profits should start to pour out of the ground, if all goes to plan, and the metal’s price stays firm.
There are caveats to this. Newcrest is a much more mature and bigger operation than Shanta, with 2.1 million ounces of annual gold output at an AISC of $1,093 at the last count and the stock offered a higher dividend yield than Shanta’s before the acquisition by Newmont.
Investors are also always likely to place a higher multiple on operations in Canada and Australia relative to ones in Africa, for geopolitical reasons, even if Tanzania is one of the most politically stable nations on the continent, in contrast to say Mali or Burkina Faso, where coups in 2021 and 2022 continue to weigh on investor sentiment toward gold diggers such as Resolute Mining (RSG) and Endeavour Mining (EDV).
Intriguingly, EQT’s bid for Shanta is the latest in a growing list of merger and acquisition deals in the gold mining industry. Barrick Gold (BAG:NYSE) swallowed up the then FTSE 100 constituent Randgold Resources in 2019, when Newmont snapped up GoldCorp in 2019.
Agnico-Eagle (AEM:NYSE) and Kirkland Lake Gold merged in 2021 and then in 2023 Agnico-Eagle and Pan American Silver (PAAS:TSX) bought and split up Yamana Gold before Newmont pounced on Newcrest.
The New York Stock Exchange’s Arca Gold Bugs index is trading no higher now than it did in November 2003, when the gold price was $390 an ounce.
Gold mining executives are clearly paying attention to this disconnect, judging by the rash of deals, even if stock markets are not, and we are therefore happy to keep faith in both Egypt-focused Centamin (CEY) and Resolute Mining.
Shanta Gold’s 2023 results are due on Thursday (March 28) and the shareholder vote on the deal takes place the week after, on Thursday, April 4.
Questor says: Gold miners could be primed to shine
Ticker: SHG:AIM
Share price at close: 14.5p
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